BP to offload Rosneft stake, Russian companies sink on London market, Associated British Foods contends with margin pressures

“In a move that feels seismic but at the same time completely unsurprising, BP has announced plans to offload its stake in Russian oil company Rosneft,” says Russ Mould, Investment Director at AJ Bell.

“Remaining invested in Rosneft could almost be literally construed as fuelling the Russian war effort and that would not have been a sustainable position for much longer. Despite the financial cost shareholders are likely to be relieved that BP has taken pre-emptive action.

“There had already been indications that the UK government was uncomfortable with BP‘s Russian links although forcing it to exit its holding in Rosneft would probably have required legislation. Equally the Russians themselves, in the face of mounting sanctions, might have made their own move to seize the asset.

“Attention will now turn to how exactly BP will affect an exit and likely bidders for its stake. There could be interest from Qatar, which already has its own position in Rosneft, or perhaps another name in the Middle East or China whose relations with Russia are less toxic.

“Ultimately the company is in a weak negotiating position and may have to accept a cut price deal. There is also a continuing risk that Moscow intervenes to take the Rosneft holding itself before BP has the chance.

“A silver lining could be that moving out of these assets accelerates BP’s transition away from fossil fuels, effectively forcing it to take the pain of an exit from some of its oil and gas exposure now.

“The spotlight will increasingly fall on BP’s peer Shell which has its own more modest Russian interests in the form of a stake in Gazprom’s Sakhalin-2 offshore gas project. It would not be a shock at this stage to see Shell follow BP’s lead.”

Markets

“Disturbing footage of Russia’s invasion of Ukraine over the weekend and the former’s decision to put its nuclear forces on high alert has served to spook investors once again, with equity markets falling across Europe.

“Weighing on the FTSE 100 was a 6.1% decline in BP, its biggest one-day fall since November 2021 and driven by the decision to exit its stake in Russian oil producer Rosneft.

“Expect a growing investor backlash against anything Russia-related, which explains why gold miner Polymetal has taken another beating, falling another 46%. Year to date the shares have now fallen by two thirds in value, putting the share price at levels not seen since 2015. Even worse was Sberbank whose London listed shares collapsed by 75%.

“Many investors are showing solidarity with the Ukraine and no longer believe it is morally right to have anything do with Russia in their portfolio.

“BAE Systems soared by 14% as investors flocked to the defence sector most likely in the belief that governments around the world would take another look at their defence budgets and increase spending. Fellow defence companies were also in demand, Chemring jumped 10% and Qinetiq was up nearly 9%, while French electrical systems group Thales advanced 13% given its position as a supplier to the defence sector.

“In the UK retail sector, McColl’s dived 57% after the convenience stores group outlined financial pressures, issued a profit warning, and said a takeover approach by an unnamed suitor had already collapsed. The market has been worried about the company’s finances for some time and it looks as if McColl’s is in a very fragile state.”

Associated British Foods

“Inflation has taken a bite out of Associated British Foods’ margins for its various food businesses. Like many businesses, there is a lag between it stomaching higher input costs and passing that on to the customer.

“While a plan is in place to put margins back where they were, investors continue to have a very short-term view and Associated British Foods’ share price takes a knock on the news.

“Primark has proved to be resilient as ever, with higher input costs being offset by lower store operating costs and favourable exchange rates.

“Clever product innovation such as having limited edition Greggs-branded clothes, hats and footwear has helped to keep people coming to its stores. You only need to look at a Primark queue in a typical store to know that demand remains strong, and customers rarely buy just one item per visit.

“All eyes will be on Primark’s new website which launches by the end of March. While falling short of letting someone order online and have items delivered to their home, it will show product availability by store.

“That could be a blessing and a curse. If someone is after a specific item and sees it available, they could rush to buy it. But if it is out of stock, Primark effectively misses out on someone going to a store to look, and then potentially buying something else if their first choice wasn’t on the shelf.”

These articles are for information purposes only and are not a personal recommendation or advice.